Foreclosure Nation

Mortgaging the American Dream

Shari B. Olefson, JD, LLM

Global Crisis

Rising Chinese Inflation to Show Up in U.S. Imports

Posted on Thursday, January 13, 2011

BEIJING — When garment buyers from New York show up next month at China’s annual trade shows to bargain over next autumn’s fashions, many will face sticker shock. “They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.” Inflation has arrived in China. And after Tuesday’s release of crucial financial statistics by China’s central bank, few economists expect Beijing officials to be able to tame rising prices any time soon. While American importers of Chinese goods will feel the squeeze, the effect on American consumers may be more subtle and the overall impact on United States inflation may be minimal. There are simply too many other markups along the way — from transportation to salesclerks’ wages — that affect the American retail prices of Chinese-made products. Excluding those markups, imports from China are equal to little more than 2 percent of the overall American economy. The bigger consumer impact is in China itself. As China’s booming economy enables more of its own citizens to buy the goods pouring out of its factories, Chinese consumers are feeling inflation directly. And Beijing is increasingly worried about the social unrest that could result. In China, consumer prices were 5.1 percent higher in November than a year earlier, according to official government data. And many economists say the official figures actually understate the rate of inflation, which might in reality be twice as high. “Four percent, China can bear it — beyond 5 percent, people will complain a lot,” said Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation here. Higher global commodity prices, as well as rising wages in China, play roles in the increasing cost of Chinese goods. But economists say the main reason for the inflation now is China’s foreign exchange reserves, which surged by a record amount in the fourth quarter. The central bank has been pumping out currency at an ever-accelerating pace over the past decade to limit the renminbi’s appreciation against the dollar. That strategy has helped preserve a competitive advantage of Chinese exporters by keeping their prices relatively low on global markets — while also protecting the jobs of tens of millions of Chinese workers in export factories. Now, though, that cheap currency policy seems to be reaching its limits. The extra renminbi are feeding inflation. That is starting to undermine exporters’ price competitiveness — just as a stronger renminbi would do if Beijing was not intervening to begin with. Money supply figures for December, which the central bank released on Tuesday, showed that cash and bank deposits were increasing at a rate twice as fast as even China’s soaring economy. Ever more renminbi are available to buy goods and services. Victor Fung, the group chairman of Li & Fung in Hong Kong, a 35,000-employee trading company that supplies most of the world’s big retailers with Asian goods, said that contracts signed late last year would produce a jump of 10 to 20 percent in the import prices of consumer goods arriving at American ports by the second quarter of this year. “By the middle of this year, you’ll see considerable diversion of trade away from China,” which will start to bring down the United States trade deficit with China, Mr. Fung said in an interview. But there are only limited alternatives to China as a supplier of cheap goods. As American retail chains scramble to shift orders to other countries like Bangladesh and the Philippines, they are finding that inflation is emerging as an issue across much of Asia. What is more, the far smaller factories in other Asian countries have little capacity to absorb the huge orders that Chinese factories routinely handle, corporate executives and economists said. In China, there is little question that the consumer price index understates the true extent of inflation. A holdover from the days of central planning, the Chinese consumer price index includes apartment rents but excludes soaring costs for owner-occupied housing. And it is based heavily on the prices of an outdated list of consumer products that are no longer popular. Garments qualify for inclusion only once they have been on sale continuously for at least six months, for example, which frequently means that they are no longer in style. Hu Xingdou, an economist at the Beijing Institute of Technology, said that a more accurate gauge of inflation would show consumer prices rising 10 percent a year. The National Bureau of Statistics has said it is actively studying ways to improve the consumer price index. Inflation in China is not just the result of China’s currency market intervention, although Mr. Hu and other economists describe it as the biggest single cause. Another cause is aggressive lending by Chinese banks, despite repeated demands by regulators to slow things down. Rising prices for exports are also caused by wage increases for Chinese blue-collar workers, whose pay has been climbing as much as 15 percent a year. Those workers have more clout than they once did because the supply of factory labor from rural areas, which once seemed inexhaustible, is starting to dry up — a result of three decades of China’s “one child” policy of family planning, as well as a big expansion in university enrollment. And globally, strong demand from consumers in China and other emerging economies is pushing up not only gasoline prices, but also the prices of cashmere, rabbit fur, cotton, copper and many other commodities. Candy Chen, the sales manager of the Zhenjiang Weishun Toys Company in Zhenjiang, China, said that the cost of plastic stuffing for the company’s toy animals had nearly doubled in the past year, while wages were up 10 to 15 percent. The effect of higher prices in China on broad measures of American inflation is far from clear. The rule of thumb for many consumer products, from shoes to garments to toys, is that the import price is only a quarter to two-fifths of the final retail price, which also includes transportation within the United States and the wages, rent, electricity bills and other costs incurred by stores. After showing little change for nearly two years, import prices for goods arriving from China at American docks rose from September to November at a rate equivalent to an annual rise of 3.6 percent. In another indicator that the Chinese central bank released Tuesday, China’s foreign reserves leaped by $199 billion in the fourth quarter. The increase was much larger than economists had expected, and they suggested that China had roughly doubled its intervention in currency markets to around $2 billion a day. China’s reserves, at $2.85 trillion, dwarf those of the world’s second-largest holder, Japan, with $1.04 trillion. The United States, by contrast, holds only $46.4 billion of foreign reserves because it prints dollars, the main reserve currency. Mr. Model of Cassin, who is visiting Beijing this week from his company headquarters just off Seventh Avenue, said that the world had changed and that Chinese manufacturers were now more interested in catering to their domestic market than in offering rock-bottom prices to big American companies. “All of a sudden, they’re more interested in selling domestically,” he said. “The American wholesaler will fight them on $5. The domestic retailer doesn’t care as much.” By KEITH BRADSHER, THE NEW YORK TIMES. Hilda Wang in Hong Kong contributed reporting.